Production of a good is characterized by external scale economies. Currently there is no trade in the product, and the product is produced in two countries. If trade is opened in this product, all production will be driven to occur in only one country.

a. With free trade, why would production occur only in one country?

b. Does opening trade bring gains to both countries? Explain.

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a Production occurring only in one country under free trade with external scale economies can be exp... View the full answer